AT&T's (T) Management Presents at Wells Fargo 2016 Convergence & Connectivity Symposium (Transcript)

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AT&T Inc. (NYSE:T) Wells Fargo 2016 Convergence & Connectivity Symposium June 21, 2016 9:00 AM ET

Executive

Bill Smith - President, Technology Operations

Analyst

Jennifer Fritzsche - Wells Fargo Securities

Jennifer Fritzsche

Welcome everyone. We’re excited to announce our first keynote of the day. Bill Smith, President of Technology Operations for AT&T. Welcome Bill.

Bill Smith

It’s my pleasure.

Jennifer Fritzsche

And Bill I will direct you to a Safe Harbor statement so the lawyers don’t get upset at me, and then we’ll get in to questions.

Bill Smith

Sounds good. Well let me call your attention to this slide and basically the comments we’ll make today will have some forward-looking items that do include risk and I would invite you to look at AT&T Investor Relations website and Security and Exchange Commission filings for current information. I would also like to say that we’re in a quiet period on the 600 megahertz auction, so I can’t address that today, and won’t be answering any questions around FirstNet bid because we don’t talk about bids that are in progress. So with that we can dive in.

Question-and-Answer Session

Q - Jennifer Fritzsche

So let’s just start with an open ended question, can you talk a little bit about your key priorities from your seat in the remaining of this year.

Bill Smith

Yeah, I think our CEO, Randall Stephenson, laid it out very well at the beginning of last year or at the beginning of this year end of last year, and that is an objective to be the preeminent integrated carrier in the world, and that sounds like a tall statement, but we take it very seriously.

His objective is that we start with an effortless customer service and I think we’ll talk about that a little bit more. But the customer experience is everything, making it easy for people to do business with us and particularly some of the things that we are doing in the enterprise space with products like network on demand, where a customer can literally change their service profile on the fly, do it themselves without any delay or having to interface with anyone else. So that’s a key part of our mission there.

I guess the second pillar of that is connectivity and integrated capabilities, and you’ll see throughout our discussion today whether it’s wireless or wire line, the ability to continue to expand the connectivity capability, and then whether it’s an enterprise or even in our consumer mass market with what we’re doing with the DIRECTV assets to bring a more integrated experience to our customers is a key pillar.

And the third pillar is looking at more global capabilities to serve our customers. Now obviously we’ve taken a big step in Mexico in Latin America in that regard. But we’re also looking at being able to do that more broadly around the world. The initiative we have on software to find networking and network function virtualization makes it, I won’t say easy, but it enables us to basically drop nodes in anywhere around the world.

And since this is basically a software based service capability, we can provide seamless functionality and identical capability anywhere in the world as long as we got the right connectivity. So we think this is going to be a big enabler for us, and we think it’s a lot and particularly our multinational customer are going find that very compelling.

The next pillar is focused on cost, and I can tell you in my organization I’m responsible for all technology operations and then the engineering construction of our network. Everything we do has a relentless focus on cost, because we understand what’s happening in the industry. As consumption increases, our customers are not looking to pay us more or for the added services they consume. So we got to really be maniacal about cost controls and we’re doing that.

And last but not the least is basically empowering and retooling our people. It’s a big change and in fact it’s a very exciting time. But we’ve got to help our folks get through that, and I think leaders really tell people - I sometimes say with my team and I manage about 40% of the AT&T population, so about a 110,000 badged employees I don’t want people scared, but I don’t want them really comfortable.

I think having our employees seeing that this is a big change, and I need to internalize that and I need to take steps to prepare myself for the future is important. And one of the things I’m very, very proud of is our company has developed a course work online that our employees can become certified in everything from big data analytics to network security to IP networking to you name it.

So we’ve really done a tremendous job I think in enabling the platform that supports our employees in growing their skillset.

Jennifer Fritzsche

You mentioned you’re also overseeing the wireless effort, the CapEx, and I wanted to ask a little bit about that, because we were - a lot of us in this room actually were at PCIA down to Dallas last month, and one of the recurring themes there was that AT&T’s spending does remain at reduced levels. And I guess is that an accurate takeaway? If so are we in a new normal stage for wireless spend?

Bill Smith

I don’t think it’s significantly reduced. Here’s a way I would characterize it, if you look at - you can’t look at CapEx spend on a quarter-by-quarter basis. You know one data point is not a trend and our first quarter spend was a little lower than normal. But if you look at fourth quarter spend of last year, it wasn’t low it was really fairly high. There are a lot of factors, I won’t go in to these, but some of the opportunities we have with vendors and other things, you get some fluctuation quarter-by-quarter.

If you look at our last two quarters and annualize those, we are on a 22 billion give or take run rate, which is where we think is about normal level for us, and our target is about 15% of revenue. We were higher than that in the VIP build-out days, so I think we’re very transparent about what those plans were. So we ran a little bit hotter than that level, but we built a lot of infrastructure and I think now we are able to reap the benefits of that. So I think we’re executing pretty consistent with our plan.

We are getting some help, as I mentioned, VIP just as a point we built a lot of additional cellular infrastructure in those days both in terms of cell sites and connectivity. So that drove CapEx up a bit, but I think that positions us very well against the industry now because we’ve got - depending on how you count them, what particular numbers you want to use, but give or take we’ve got roughly 20% more cell sites than our largest competitor. So while the money that we had to invest to get there drove our CapEx up a little bit now we can actually add carriers and add capacity there and do it very cost effectively. So that’s one of the things that’s helping us.

The other thing is we’re starting to see some benefits of our Domain 2 strategy. So, we’re just on the early phases of that, but I will tell you, I’m in my 37th year with AT&T and I’ve seen most every technological change that have come and gone. I always get a little nervous because sometimes I look in the audience and I have been working for AT&T longer than many of the people been alive that’s something that’s troubling at times. But nevertheless, this is more exciting to me than any change that I’ve seen in my career, whether it was wire line to wireless, copper to fiber, circuit to packet, you name it, because this is fundamentally changing us from hardware oriented company to a software company. We’re starting to see some of the early benefits of that. So that’s helping us a lot.

The other thing I would say is, we’re kind of breaking down the barriers between wireless and wire line. I came more from the wire line business and had always a little bit of frustration for me because for many years before I picked up operations in construction and everything for the wireless side of the business, in the wire line world, I was spending a lot of money that was directly supporting the wireless operation, but it showed up as wire line spend. So we’re not that good at allocating those expenditures. So I think now if you look at the degree of integration that we’re seeing at least at AT&T that we’re getting the benefits of that whether you look at what we’re doing for our fiber to the prem build-out. We are able to put fiber in there for cell sites or vice versa if we need to build gigabyte Ethernet connectivity for cell site we look a route and say well, we see fiber to prem plan there, so we’re getting better leverage in that regard.

So if you look at it globally, here is I think a very compelling stat for me. If you look at the ’13-’14 CapEx plan versus the ’15-’16 CapEx plan, in ’15-’16 we’re going to deploy about 250% of the capacity that we did in ’13-’14 and we’re going to do it for 75% of the cost. So I think that shows that we had a hump, we got through that and we’re back more to a steady state, but I would not recommend taking the first quarter of ’16 and thinking that is steady state, it is not.

Jennifer Fritzsche

It is not. And we’re going to get to SDN and virtualization because that’s clearly an important point. But I do want to just stick with wireless, if our network capacity, no spectrum question there, I understand that. But can you talk about your plans for capacity to handle your new over the top offerings which are expected to come this fourth quarter.

Bill Smith

Sure. And one thing I should mention before we get off to CapEx totally. I forgot to mention Mexico, which we are making good progress there.

Jennifer Fritzsche

And that’s included in that --.

Bill Smith

That is included. In Mexico we are over 50 million pops covered as of the end of the first quarter. By the end of this year, we expect to be about 75 million and then by the end of ’18 we’ll be at 100 million. My colleagues in Mexico they are basically running their operation. We in the states are given them all the care and feeding and support we can. But they are doing a tremendous job with that rollout. And I saw some of the early third party testing and they are making incredible progress there. So that’s another facet that we have to figure in there.

But getting back to the capacity question, I don’t lay awake at night worried about that. Yeah there are a lot more demands coming in to the business, but there is nothing new about that. We’ve lived through many, many cases of new applications, new waves causing increases in consumption.

I feel very good about where we are. The density of our network is very strong, and as I mentioned, I think we lead the industry in terms of US footprint in the density of our network and that’s great. Also we have things like small cell coming on the horizon. We’ll probably talk a little bit - you may want to talk a little bit more about small cell, but there is some very specific things about how that plays in, but it’s a tool in our toolkit, definitely.

Then we look at oDAS and iDAS for building coverage, plus we’ve got new technologies coming on board, new spectrum bands coming on board. So we see significant amounts of increased consumption, but we think we have a very good plan for how to deal with it.

Jennifer Fritzsche

And for small cells you’ve been there. I mean I feel like there this misperception that AT&T hasn’t been there. Can you talk a little bit about the plans and is there - that we’re going to have some small cell providers speaking later today. Do you prefer to have an oDAS or would you consider like a neutral party host.

Bill Smith

It depends on the situation, and at the end of the day in my mind a lot of it comes back down to my earlier question the one of cost. What is the most cost effective? You know engineering by its definition is solving a problem and doing it economically and so that’s kind of the message that I have for my team. There has been a misconception, I think early on AT&T was really pushing hard on some of the small cell activities. We I think made some public comments about how many we thought we would deploy. That probably at that point in time was speculation.

The reality is, I see small cell as a very, very important tool in my toolkit. However, it’s not the only tool in your toolkit. If you’re trying solve a broad capacity problem with small cells it’s an expensive solution. If you’re trying to solve an isolated or targeted capacity problem, it’s a wonderful solution.

So if you look at cost per gigabit delivered, it’s going to be higher on a small cell. You don’t have the law of large numbers working to your advantage that you have with macro solution. However, if you’re trying to solve a very limited capacity exhaust situation then you can drop in a small cell solution. It’s very cost effective. So what I directed our engineering team is look guys, we’re not going to put out a target to deploy X number of small cells in a particular period of time. What I want you to do is look at the problem you’re trying to solve and figure out if you can solve it more effectively with a macro solution like cell splits or can you go in and solve it with a targeted solution like a small cell and let’s go back that way. So it’s economically driven.

Now to the question about whether we do it ourselves or third parties. We’re looking at both honestly. I absolutely insisted with my team that we do some of our own builds, so that we completely understand what those costs are. And honestly I believe in our wire line footprint, we should be able to do it more cost effectively than anyone else.

Now having said that, much like what we’ve done with DAS systems in enterprise and venue space, we got no problem with doing it as a neutral host. I mean this is not a religious or anything for us. This is using economics and common sense to find the right solution. Out of our footprint, place like Manhattan or many other parts of the country where we don’t have the wire line infrastructure that we do other places in to our footprint than I am completely open to having a dialog with third parties and we’re doing that as we speak. So at the end of the day economics will dictate.

Jennifer Fritzsche

But do you want to shift to SDN and virtualization? You know AT&T really has been in the forefront here with the SDN and network virtualization. Can you talk about where you are in that transformation, you’ve given some nice benchmarks of where you plan to be and if we can talk through that?

Bill Smith

Sure, I’d love to. As I’ve said earlier, I think this is the most exciting thing I’ve seen in my career. I just came back off of a [storm] [ph], Jennifer. I’ve just gotten back to the US off of almost a two week tour around much of the world looking at what’s going on in India, Israel, throughout Europe. And it was really fascinating to me to see how much traction we’re getting and I think we truly are out front of most of the people in the industry on this.

We set a benchmark to have 5% of our network function virtualized by the end of ’15 and we accomplished that. We now have our next benchmark to have 30% of those functions virtualized by the end of this year. We’ve got something on the order of 15 million wireless customers running on a virtualized core on a network today. So this is not something that we’re talking about doing, this is not something we’re thinking about doing, this is something that we are doing today as I speak.

Now the area that I spend a lot of my energy on in this regard is building the operations capabilities around it. So I have no reservations about my colleagues being able to develop these capabilities to take a special purpose piece of hardware and replicate its functionality and software running on White Box platform. I have zero reservations about their ability to do that.

What I’m really trying to make sure I’ve got a team focused on and I do have now is operating in this new world, because when you got functions like border gateway controller or firewall, you take - pick your favorite network element, and you’ve got it running on virtualized machines and different datacenters, the control and management of that is not for the faint of heart, I’ll put it that way, but it’s an exciting new step for us and we’re making very good progress and I think it’s going to be a game changer for us.

And I think right now we’re really trying to coalesce a lot of the players around the world against some common approaches. The one thing that won’t work well for us is if everybody in the industry takes a different flavor of solving the problem. So our team and my colleagues are spending a significant amount of time working through both some of the standards communities as well as reaching out to other players around the world to make sure that we get critical mass around particular approaches here. But we’re making very good progress.

Jennifer Fritzsche

And you mentioned huge focus on cost. Can you just put some numbers around what this could mean for the P&L, because it seems like this could remove significant cost out of the infrastructure.

Bill Smith

I think it can, you have to be careful about what elements of cost you put in play. I think for example, digging trenches to place fiber is not getting any cheaper for Domain 2. So you have to basically dis-aggregate that $22 billion of spend as to how much of that is within the D2 impacted area.

Jennifer Fritzsche

Okay.

Bill Smith

And right off the top of my head I would say that somewhere between probably 25% to 40% of that 22 billion is applicable to D2 spend, and if you think that we could get in order of all-in by the time you put everything maybe on the order 40% to 50% efficiencies there, I think that’s realistic now. It’s not something that we should be building in the financial models or anything like that at this point in time, but just to look at it with a common sense [inaudible] my career so we know now to do that.

The fact of the matter is we’re doing it at cost per home past levels that frankly I wasn’t sure were possible two or three years ago. So I’m thrilled with how that’s going. The biggest area that we still got to solve and I’ve got a lot of people working on that is in the buried areas, because as I said earlier, digging trench, we haven’t figured out how to dig a trench more cost effectively, but if you look at some of what we’re doing in our aerial construction in particular, the cost per living unit past has been extremely good and I’m thrilled with that.

Then you take that over, we haven’t talked about businesses, but we’ve had a very direct plan to build more and more fiber to the businesses, and when you get a fiber in to a business and you get a Ethernet mux there, the ability to automate provisioning and even ultimately automate a lot of what they want to do for their own services gets to be incredible.

The thing that I like about our position as an integrated carrier is as I go in now and build out areas with fiber-to-prem with this GPON architecture or even in to the business areas with the same, you can do it with a thought of having 5G services coming along. And as many of you know, with things like millimeter wave and other stuff, your propagation areas are very short.

So the reality is that to some degree there’s almost no such thing as a wireless network. All networks have a wired component, or all networks are built on a wired infrastructure, it’s really just how long the air link is that matters. And I think the way that we’re architecting and building our network with an integrated plan and integrated approach puts us in a very good position going forward. So yeah, fiber is and will continue to be an integral part of what we need to be doing.

Jennifer Fritzsche

And you mention the FCC commitment to build fiber to 12.5 million homes, customer locations. Some might say given the amount of households in your footprint that might not be a critical amount. What can we expect, could that go higher if it’s so critical like what you’ve said?

Bill Smith

Well I would put it this way, I wouldn’t want to get in trouble our CFO or CEO by announcing any plans. But if I look back at my career, every time we’ve had an initiative to get to a certain number of homes passed or customer passed, we’ve always wound up exceeding that. As cost curves continue to drive down, it makes the economics change. I don’t think that we’ll be the stopping point honestly, and there are some other parts of things that we’re doing that we’re not “allowed” to take credit for and that there are limits to how much greenfield construction we can put in there, some of the Connect America funds can’t be included in that.

And then I think if you look five years in the future, the last - I’m trying to say the last mile. The last 1000 feet may not be fiber, it may be 5G wireless solutions, but we’ll still be providing a gigabit per second of connectivity. So who cares whether there’s actually a fiber facility connecting it or not.

Jennifer Fritzsche

Perfect segway to my strategy question. So, can you talk about how you’re currently thinking of 5G in terms of your network evolution? Some might say AT&T has talked less about it than some others. But again I don’t think that necessarily means you’re not there in any big way.

Bill Smith

No, we’re not - we’re trying to avoid hyping the industry around things, and our industry is such that kind of any new technology or any new capability seems to come with a fair amount of hype. But rest assured we’re doing anything, anybody also is doing in 5G. We’ve got lab activities going on, we’ve filed dozens of patents around it. We have trials going on in Austin this year, we’ll be looking at both 15 and 28 gigahertz solutions. But we are very, very much heads down on 5G.

It’s interesting is because 5G brings different characteristics to the table that we’re looking at. We’re expecting to have performance in the 5 to 20 gig capabilities. So that’s - and in some of our lab testing we’ve already seen something north of 10 gig throughput. So that’s says, it’s imminently doable in that regard. But you at it for a couple of ways, one is, very high bandwidth wireless capability is one. The other is a focus on kind of the Internet of Things or IoT capabilities that go along with it.

In a very dense configuration people are talking about things like a million devices per square kilometer in the IoT world. So we think we live in a connected society today, but we as the old saying, we ain’t seeing nothing yet, when you look at what can happen when every device imaginable has connectivity to it.

The other one that’s really interesting to me is the low latency requirement that’s come along. So if you look at where we are with the standards for 5G, the first wave is expected phase 1 which I think is release 15 is expected probably in the mid 2018 timeframe, and so that’s focusing on specific set of standard around some of the millimeter wave capabilities and some other things.

And in the next wave that will be probably late ’19 is focusing on some of the other aspects like the IoT functionality and the latency characteristics etcetera. So you can rest assure we’ll be in lock step with what’s happening. We’ll be doing trials and other things. But I think for large scale standard based deployment supported by a broad array of CPE, with everything in the ecosystem that’s required to do something other than announced trials, we believe it’s probably a 2020 timeframe to start really scaling it up.

But the one aspect of this, I was telling somebody the other day, I never thought that I would see the speed of light as a financial impairment in our business. But if you look at the latency requirement associated with 5G, you’re literally getting to the point where a 186,000 miles per second, which is the speed of light to deliver that back to some central location to process and get back and meet the latency budget end-to-end for all that stuff, and we literally could be getting to the point where the speed of light is a constraint in network design.

So it’s a fascinating set of issues working on, but we are very aggressive in what we think it can bring to our business. And particularly when you ask about all over-the-top video and all - 5G is a key part of how we solve that problem or that opportunity.

Jennifer Fritzsche

I know I get 600% off limits, but a lot of has been made about your spectrum portfolio especially this 40 megahertz of [Inaudible] spectrum, which is the waiting deployment or maybe that’s a wrong assumption, maybe a lot of that [AWIC] seem to point. But how do you think of your existing portfolio and the aggregate? What are your thoughts on it? I mean you have the low band, the mid band and some high band with 2.1.

Bill Smith

You know spectrum for network operators you always wish you had more, but there’s never enough. But we feel very good about where we are right now. There is always situations where you have a pocket in a particular metro where you wish you had a little more low band or whatever, but generally speaking we feel very good about our overall portfolio.

You talk about the spectrum that we are in the process of putting in service where the WCS we started putting in service late last year, we are putting in a service on as needed basis. So it’s not the kind of thing where we’re going out and spending capital just to say that we put in service, but as the need trigger arises we’ll put in service. So we’ve got something like 2700 carriers of WCS in service today and I think by the end of the year we’re going to have something on the order of 14,000, 15,000 carriers in service of WCS.

Then we expect to see the AWS 3 start in ’18 more likely. So it’s something that we’ll forward. And then the other part which kind of comes in to play and as you look at 5G and other things is, wireless unlicensed has to come in the mix when you think about wireless solutions. It’s interesting to me that kind of a little known fact for lack of a better term is that about 80% of the wireless traffic today it’s handled over Wi-Fi networks.

So, we are actually pretty bullish around how we take not only Wi-Fi but other unlicensed bands, and if you build a control plain that is sophisticated enough to manage that effectively, it can really help you with your efficiency. So if you look at something like Voice-over-Wi-Fi, for example, we’re now carrying 4 million calls a day on Voice-over-Wi-Fi and we just recently started turning up android based operating systems, so I think that’s going to go up tremendously and we’re doing it at extremely impressive performance levels.

So when you consider that this has been a kind of un-engineered asset that we’ve been taking advantage of, I think if you look going forward, we will be sophisticate enough to use unlicensed bands more effectively and in a more sophisticated manner.

Jennifer Fritzsche

On the [inaudible] spectrum with the AWS-3 do you have to - can you use them with your existing AWS-3, and also does it require more equipment. I know I have received it.

Bill Smith

In many cases it’s going to require more equipment there’s in it. Equipment is a broad category, you’ve almost got to look at tower-by-tower, antenna-by-antenna to see what the capabilities are there. So depending on the exact situation in many cases we will have to deploy new equipment. But it’s not necessarily case every time, because it just depends on the antenna.

Obviously the thing that I look at is I do my best to avoid having to do work at the top of the tower. Work at the bottom of the tower is not as bad, so any time we place an antenna we try and buy an antenna and place it with this much more forward future proof as we can, so that kind of depends on what genre you’re dealing with and what your - but more often than not I think we’ll have to put all those bands and services. We’ll have to do fair amount of work on the towers.

Jennifer Fritzsche

And my last question on network security, I mean this is becoming increasingly important topic especially in light of all of the new network transformation and initiative. How do you think about network security and, I guess specifically how do you think about effectively future proofing your network?

Bill Smith

Yeah, that probably is a thing as the operations guy that I spend the most cycles on or sometimes I say keeps me awake at night more than anything else, because I’ve got a very, very talented group of people that deal with this every day, and I always kind of say that, they try their best to stay a step ahead of the bad guys and we do a pretty good job of that, so far they do. But there are a lot of people out there that are attacking our network every day and they are very sophisticated in their attack. So this is not mischievous kids in a garage, these are very sophisticated state sponsored organizations and so we work very hard and we’ve got a lot of resources, lot of people dedicated to staying a step ahead of them.

We believe you got to do it at multiple levels. I think you got to do it at the device level, number one. So you got to make sure that your devices are built in with a strong security in mind. Then you got to do it at the connectivity level, so if you look at what we’re doing with our network on demand and our net bond capability is a feature that we’ve developed. It allows people in essence connect datacenters through our network with, if you will an instance VPN capability for security. So connectivity level is important.

Then you look at the actual application level, so you’ve got to build the application with security in mind. And then last but not least, one of the things that we spent a lot of energy on and I think is part of the solution is having data analytics at a macro level that look in end-to-end. So we’ve got a group of data scientist that are constantly looking for things that you shouldn’t see happening in the network.

So, for example, if this type of a user is sending this kind of a message to try and control this network feature, that’s something that generally shouldn’t happen. So putting that kind of a macro sort of data analytics on top of everything is kind of the end-to-end blanket to try and catch things that don’t get caught at either the device connectivity or application level is the fourth line of defense in our mind and we’re very committed to that.

Jennifer Fritzsche

Well it sounds like an exciting time at AT&T. Great. Well thank you so much for joining us.

Bill Smith

It’s my pleasure.

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